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Is BHP Billiton Limited a buy at this share price?

Credit: Lucas Walters

The BHP Billiton Limited (ASX: BHP) share price is currently trading around $23.27, still well below it’s 52-week high price of $27.95 reached in January this year.

However, the share price has recovered well from the low of $17.29 it hit in June 2016.

Iron ore, copper and coal prices have improved since the start of the year, and analysts have become much more bullish about BHP’s prospects. According to Reuters, nine analysts have a Buy rating, with just two analysts having a sell rating. Eight analysts are sitting on the fence with hold ratings.

Three months ago, only seven analysts thought the giant resources company was a buy, with eleven sitting on a hold rating.

One major issue BHP faces is a declining oil price. Since May, Brent crude oil has dropped from above US$54 a barrel to currently trade at US$47.70 a barrel. US stockpiles surprisingly rose which puts downward pressure on oil, although escalating tensions in the Middle-East and Libya’s biggest oil field halting could see the price rise from here.

Some investors are agitating for BHP to split off its oil business to increase shareholder value – but that appears to be short-term thinking, rather than a long-term strategy. Petroleum also generated around 18% of the miner’s revenues in the first half of the 2017 financial year, with iron ore the lion’s share at 37%. As such, BHP is unlikely to hive off its oil division, despite the current low oil prices and the potential for more falls.

The problem for investors is that BHP’s earnings are forecast to fall over the next three financial years, and dividends are expected to continue declining as well. That makes BHP’s current dividend yield of 3% unreliable.

As earnings fall, share prices tend to follow, so investors buying in today could see a trifecta of lower earnings, capital losses and lower dividends.

Foolish takeaway

There’s no rule that says investors have to invest in Australian resource stocks like BHP and Rio Tinto Limited (ASX: RIO). Given the outlook for commodity prices and BHP’s earnings, there’s no reason to be buying shares in the big miner today.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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